CRUISERS: RCL ENTERING ROCKY WATERS?

Pricing survey suggests weaker RCL pricing

The concentration of recent cruise ship issues has begun to impact RCL. During our recent pricing survey, we saw pricing deterioration, particularly with the Celebrity and RC brands. This is a sharp downward shift from more optimistic trends seen in April and May, when RCL seemed to have weathered Carnival’s troubles relatively well. The high end of RCL’s 2013 net yield guidance of +2-4% looks very aggressive if the pricing weakness continues into the summer months. CCL brands, with the exception of Costa, actually experienced stable pricing since its revised guidance on May 20. Could CCL yield expectations finally be reasonable? We would likely need another month of data to answer that.

The cruise industry continues to deal with a litany of problems in 2013 e.g. fires, operational failures, norovirus, and government-related issues. While the number of incidents at sea is on par with past years, scrutiny from the media has been heightened this year because of the seriousness of some of these issues. The latest incidents are the Royal Caribbean Grandeur of the Seas fire (May 27), two Celebrity Xpedition itinerary cancellations to the Galapagos due to violations of local law (May 31), and operational problems aboard the newly revitalized Carnival Sunshine that led to a cancellation. (June 1). Moreover, historic flooding in Eastern Europe is a downer in an already weak macro environment.

Here is what we’re seeing from our proprietary pricing survey for early June in Europe and North America. We analyze YoY trends, as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator i.e. RCL: 4/25, CCL: 5/20, NCLH: 5/6.

EUROPE

Based on our survey, RCL overall pricing lost a couple of % points in pricing relative to May. RC brand F3Q pricing in June was only marginally higher YoY in Europe, down from mid-single digit growth in May. F4Q RC pricing remains lower YoY . Celebrity pricing also took a hit in F3Q and F4Q while Pullmantour pricing was steady. European capacity accounts for 25% of total capacity in F4Q.

Costa F3Q pricing has deteriorated moderately in the last two weeks. However, Costa’s FQ4 pricing remains strong at low double digit growth. Princess, Cunard, Holland F3Q pricing are lower YoY but the trend is stable to slightly higher. AIDA 3Q pricing also stabilized in June. Generally, F4Q pricing is looking better than F3Q, but the trend is worsening.

Norwegian’s European very close-in F2Q pricing is particularly weak. F3Q and F1Q 2014 pricing hasn’t moved much since May.

NORTH AMERICA

Caribbean

The Caribbean accounts for roughly 34%, 23% and 29% of Carnival’s total itineraries for F2Q, F3Q, and F4Q. In June, Carnival brand pricing bounced back for F3Q, although lower YoY pricing continues to be in the high single digits. Pricing trend for F4Q and F1Q 2014 was consistent with that of two weeks ago.

RC brand pricing for F3Q is now declining in the mid-single digits, a sharp reversal from the mid-single digit growth seen in May. F4Q pricing is also moderately lower compared with slightly lower pricing in May. A similar trend is emerging for very early F1Q 2014 pricing.

Celebrity’s pricing trend is stable for F4Q but lower for F1Q 2014.

Norwegian's Caribbean pricing is as stable as it can get. Breakaway and Getaway pricing for Jan 2014 has not moved since April.

Alaska

The biggest disappointment was premium pricing in Alaska. Holland America and Celebrity continue to discount heavily to fill up cabins. On the brighter side, RC brand pricing is nicely higher.

Mexico

Carnival’s pricing struggles in Mexico remain for F3Q, with pricing down 15% YoY, partially due to hard comps. F4Q and F1Q pricing are both slightly higher. Pricing trend is positive for all three periods.

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06/06/13 11:30 AM EDT

INITIAL CLAIMS: STAGNATION MIRAGE

Takeaway:On a seasonally-adjusted basis, the labor market is showing signs of cooling off. This is the same illusion that's been there for 3 years.

Below is the breakdown of this morning's claims data from the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

Labor Market: Divergences Finally Becoming Apparent

The funny thing about economic data series is that the inflection breaks often aren't apparent until well after the fact, i.e. 20-20 hindsight. That's why its important to spot things early and try and understand a) why they're happening and b) the implications.

With that in mind, the divergence between the SA and NSA initial claims data is finally beginning to become apparent. As the first chart below shows, the seasonally-adjusted data is now almost flat in the March to present time period (the purple hatched line is almost level). This is an inflection from the August 2012-February 2013 environment of notable negative slope (steadily improving claims). The inflection is expected as it is following the same trend over the past three years, owing to faulty seasonal adjustment factors in the government's model. It's important because the market still cues off the SA data, so, to the market's eye, the data is beginning to stagnate.

In the second chart we show the NSA data, which continues to improve at a well-above trend rate. Note the negative slope in the black line vs. the positive slopes in the previous years' lines. In this case, negative is good, because it depicts accelerating improvement.

To the extent the recent sell-off continues, likely on the back of the Fed-in-a-box narrative (good news = bad, bad news = bad), we think this labor market data makes it clear that investors should be buying red, but doing so with the understanding that the labor data will continue to appear to deteriorate through August (3 more months) before again beginning to turn positive.

The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 3k to 357k.

The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 352.5k.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%

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ISLE F4Q 2013 CONFERENCE CALL NOTES

Regional recovery? Not yet

"Consistent with other regional gaming companies, the quarter presented a difficult operating environment in our markets, as the combination of continuing economic challenges, changes in payroll tax rates and the delay in income tax refunds led to softer business levels at our casinos. In addition, when compared to the extremely mild winter in fiscal 2012, there was significant impact from weather-related disruptions in the fiscal 2013 quarter. Finally, the fourth quarter of fiscal 2012 contained an extra 14th week compared to 13 weeks in this year's quarter. Adjusting for the extra week in fiscal 2012 and last year's insurance recoveries, we believe our results were in-line with other regional casino operators."

Drew customers from Caruthersville due to increased marketing spend at Cape G. But will rationalize that spend going forward.

More conservative on insurance costs going forward

Houston market remains underpenetrated

Weather impact: Davenport closed for 8 days due to flooding

Mississippi: cashed $9.5MM in tax refund checks last year; this year, it was <$7.5MM

Philly casino: at most, capital investment would be $25MM

Expect a decision by regulatory authority by the end of the year

SSS April was down 4-5% across regional markets; overall regional trends pretty steady

May trends: no change in consumer behavior or patterns

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06/06/13 10:40 AM EDT

INITIAL CLAIMS: STAGNATION MIRAGE

Takeaway:On a seasonally-adjusted basis, the labor market is showing signs of cooling off. This is the same illusion that's been there for 3 years.

Labor Market: Divergences Finally Becoming Apparent

The funny thing about economic data series is that the inflection breaks often aren't apparent until well after the fact, i.e. 20-20 hindsight. That's why its important to spot things early and try and understand a) why they're happening and b) the implications.

With that in mind, the divergence between the SA and NSA initial claims data is finally beginning to become apparent. As the first chart below shows, the seasonally-adjusted data is now almost flat in the March to present time period (the purple hatched line is almost level). This is an inflection from the August 2012-February 2013 environment of notable negative slope (steadily improving claims). The inflection is expected as it is following the same trend over the past three years, owing to faulty seasonal adjustment factors in the government's model. It's important because the market still cues off the SA data, so, to the market's eye, the data is beginning to stagnate.

In the second chart we show the NSA data, which continues to improve at a well-above trend rate. Note the negative slope in the black line vs. the positive slopes in the previous years' lines. In this case, negative is good, because it depicts accelerating improvement.

To the extent the recent sell-off continues, likely on the back of the Fed-in-a-box narrative (good news = bad, bad news = bad), we think this labor market data makes it clear that investors should be buying red, but doing so with the understanding that the labor data will continue to appear to deteriorate through August (3 more months) before again beginning to turn positive.

The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 3k to 357k.

The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 352.5k.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%

SHORT THE YEN, BUY THE NIKKEI?

Takeaway:If you’re bearish on US growth, get long the yen and short the Nikkei with impunity. Do the opposite if you’re constructive on US growth.

This note was originally published June 05, 2013 at 13:28 in Macro

SUMMARY BULLETS:

The "Third Arrow" of Shinzo Abe's "Abenomics" agenda wildly disappointed investor expectations. We detail those disappointments and a widely-misunderstood critical policy delta in the first part of the note below.

Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.

As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.

While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively.

That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.

All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

"THIRD ARROW" OR "FIRST RODEO"?

Today, Japanese Prime Minster Shinzo Abe unveiled the “Third Arrow” of his Abenomics agenda, which mostly consisted of a series of grand targets for various economic measures with little-to-no details for how to achieve them:

Promote a +¥1.5M increase in gross national income per capita over 10 years – implying a CAGR of +3.4%;

Increase capital spending by +10% to ¥70T over the next three years;

Deregulate the energy, health and infrastructure sectors;

Boost power-related investment +150% to ¥30T;

Set up special economic zones in Tokyo and other large cities to attract foreign investment;

Double FDI to ¥35T by 2020;

Double exports from small and medium-sized companies by 2020;

Double farm exports by 2020;

Triple infrastructure exports, such as bullet trains and nuclear plants, to ¥30T; and

Have 70% of all exports covered by free trade deals – including the Trans-Pacific Economic Partnership – by 2018 (up from 19% now).

Taken in their entirety, these goals are designed to perpetuate an average of +3% nominal GDP growth and +2% real GDP growth over the next decade. Also worth noting is the disappointing lack of targets for reforming Japan’s public pension allocation and lowering corporate taxes, which, at 37%, are the second highest in the OECD.

It goes without saying that there’s a lot of politicized junk food to sift through from Abe’s speech today, but the updated GDP targets were by far the most important takeaway as it relates to Japanese and globally-interconnected financial market risk. If these nominal and real GDP targets are, in fact, accurate, this inherently takes down the LDP’s former +2% inflation target to +1%. Ultimately, this implies that the BOJ doesn’t have to be as aggressive in pursuing its monetary easing agenda.

It is rather unclear to us how Abe & Co. plan to adhere to a potentially lower inflation target in the context of what would be an unprecedented string of wage growth with respect to the post-bubble Japanese economy. More clarity in needed as it relates to whether or not the CPI target has truly been revised down -100bps to +1%; we’ll learn for sure by the end of next week (ether during the upcoming “Third Arrow” ratification process that is scheduled to take place JUN 12-14 in the Diet or at the BOJ’s JUN 11 board meeting).

THE ABENOMICS TRADE: WHERE TO FROM HERE?

All in, the JPY is up +3.8% vs. the USD since MAY 22, which compares to about +1.7% for the EUR (likely dragged up on a correlation-weighted basis). Going back to our 5/10 note titled: “TRADING ABENOMICS FROM HERE”, the sustainability of the Abenomics trade we authored (short yen; long Japanese equity reflation) has become primarily a function of the slope of US economic growth expectations and not a function of Japanese policy as it had been prior to then.

The only meaningful Japanese catalyst left is the JUL Upper House elections, but even that is turning out to be less of a catalyst as its outcome becomes increasingly obvious: per a recent Nikkei Newspaper poll, almost half of voters planned to vote for the LDP, compared with 6% for the next largest party (DPJ). An LDP majority would give Abe & Co. free reign to delay fiscal reform to the extent they aren’t getting the results they are currently hoping for on the GDP growth front several quarters from now. Recall that outgoing Prime Minster Yoshihiko Noda of the DPJ staked his political career and his Party’s fate on passing the VAT hike legislation.

On the flip side, the only probable catalysts we see that could derail the Abenomics trade are likely to continue coming from Japan at this point – much akin to today’s disappointing “Third Arrow” speech and Friday’s news that Japan’s FSA tightened rules on forex margin trading, which were designed to “protect investors” and “limit speculation”.

Needless to say, the latest US mini-growth scare we’ve experienced over the past 2-3 weeks has weighed on the USD. Ironically, to us at least, the scare is being perpetuated by rising interest rates – which have historically signaled an acceleration in the trend growth rate(s) of US GDP. Consensus has become so hooked on financial repression that investors are broadly missing what may wind up being the most obvious economic signal in recent memory.

Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.

As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.

Indeed, the Abenomics trade has experienced a fairly meaningful correction in recent weeks (the Nikkei 225 is down -16.7% from its 5/22 YTD peak; the USD/JPY cross is down -3.8% from its 5/17 YTD peak); on the heels of this demonstrable pullback, the Nikkei 225 Index is now broken TRADE and TREND on our quantitative risk management score.

While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively. That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.

All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

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